When Eskom CEO Andre de Ruyter suspended the managers of two power stations last week for apparently not doing their jobs properly, it was national news. In most countries, dismissals of this sort would not even have made it onto industry news sites.

A statement from the Eskom board in support of De Ruyter showed he needed high-level back-up for the decision. Clearly, De Ruyter is keen to do a good job, but he is having to tread carefully and his hands are tied on many important decisions required for a turnaround.

That ultimate authority on key strategic and operating decisions lies with the government or Luthuli House. That accounts for much of the reason for Eskom’s slow demise, and that of most of the public enterprises.

Any effort to come up with emergency solutions to load-shedding, lowering costs and raising revenue at Eskom has the potential to run into a political wall. After all, Eskom is a source of immense power and patronage for the government. 

Public ownership accounts for much of the reason why Eskom is in a bind, lacks urgency in dealing with the power crisis, and is dragging down the economy. Especially strong political will is required for turning around a public enterprise that has come to sustain deeply vested interests.

Yet South Africa is experiencing immense economic damage from the cost of Eskom’s rule by vested interests. The absence of a reliable power supply constrains economic growth and deters investment. Eskom’s debt is about 10 percent of GDP, 80 percent of which is guaranteed by the State. If Eskom were to collapse, there would be a massive effect on our financial system. Government cannot possibly continue bailing out Eskom without substantial cost, as it diverts resources from more compelling needs, and drives up the fiscal deficit and debt.

This year has seen the most load-shedding yet, despite the Covid-19 economic slowdown resulting in falling demand for power.

Unplanned breakdowns

At the start of last week Eskom said unplanned breakdowns and planned maintenance meant 37 percent of its total nominal generating capacity was out of commission. The government think tank, the Council for Scientific and Industrial Research, recently said it expects five times more load-shedding in each of the next three years than in 2019, which had previously been the worst year for outages.

Much is at stake, but in virtually every decision that must be taken to turn around Eskom, there is a big political cost. That is the nature of the bind. Ensuring lower-cost procurement could mean a political cost to the government, as it could mean fewer empowerment contracts. Capping or cutting wages and layoffs would mean outraging the ANC’s union allies. Further raising electricity prices to raise revenue for maintenance and new investment could drive many heavy industrial users under and could spark street protests. A massive renewables and gas programme would upset coal and other interests. And privatisation could undermine state power and upset party ideologues.

The reforms introduced by President Cyril Ramaphosa earlier this year could be of great significance, if implemented. The far greater scope for independent power producers to sell into the grid and generate for their own use is highly positive. Private producers could now supply the grid to a limited extent and municipalities would not be compelled to buy from Eskom, thereby breaking the Eskom monopoly.The extent to which there will be an urgent supply response must still be tested. There are still restrictions on private producers that could hinder investment, and questions remain about Eskom’s ability to serve the transmission requirements of the new producers.

Far greater private sector involvement

This and the Eskom break-up into generation, transmission, and distribution could pave the way to far greater private sector involvement, subject to derailment by coal and labour interests. In the Integrated Resource Plan, South Africa has a plan for an energy future far more dependent on renewables and gas. Whether this will see a demise of Eskom in favour of a private-sector energy future is doubtful given the ANC’s stance.

South Africa has massive reserves and will remain reliant on coal for years to come. The most straightforward solution is privatisation of power stations, or, at the least, offering contracts for their operation and maintenance. A sell-off of coal-based power stations might be difficult in these environmentally aware times, yet there is always a price. However, these would have to be accompanied by changes in regulation on, perhaps, empowerment, electricity tariffs, and labour laws. The ANC has rejected the privatisation path, clearly tightening the bind in which Eskom finds itself.

There is great urgency to get Eskom out of its dilemma, yet slow government processes do not help. The government says it will announce a preferred bidder for 2000 MW in emergency power in late December, which will be more than a year after the request for information was issued.

Time is running out for the bulk of Eskom’s productive capacity. It has an ageing fleet of power stations that will in the next 15 to 20 years, if not before, have to be scrapped. Their natural life is in the region of 60 years, but neglect and poor maintenance have probably shortened their lives. The two newly built flagship power stations, Kusile and Medupi, have been a disaster and much has to be done to make them fit for purpose.

Longer-term problems

Eskom is severely short of the cash flow needed for maintenance and refurbishment, never mind new power stations. Only now, under De Ruyter, is Eskom aggressively pursuing big municipal customers in arrears, but there are other longer-term problems. Years of frequent load-shedding and high power prices have resulted in defections from the grid and therefore depressed revenue.

Eskom is a high-cost operation due to fraud and much overly expensive procurement. According to the IMF, Eskom has been purchasing coal at significantly above world prices. And over the past 15 years the workforce has risen by 50 percent, along with a real increase in wages over this period by 50 percent, which is well in excess of productivity.

With existing high debt levels, substantial losses, and being unable to service its debt without government bailouts, Eskom cannot raise new capital on a scale required for new investment. Due to its dire financial situation Eskom has had to borrow at a widening spread over the rate at which the state pays.

There have been successful power utilities, but these have a high degree of managerial independence and certainty of good policies. This has turned out to be impossible in South Africa, where public enterprises have been used before, during, and after the period of state capture as a means to extend state power. 

Eskom has become unfit for purpose and cannot be allowed to lead the country into its energy future. The world has increasingly abandoned the state-owned model for power utilities. South Africa should follow.

[Picture: Rohan Makhecha on Unsplash]

The views of the writer are not necessarily the views of the Daily Friend or the IRR

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12 COMMENTS

  1. As far as Eskom is concerned, we sit with a Government hell bent on their own interests and never in the interests of the country. The private sector should have been called in to get their spare capacity into the grid from day one to solve this never ending load shedding debacle. At great cost to the country they have refused to go down this road lest they lose control of the power supply. So what if they lost control at least we wouldn’t have load shedding and we could go forward economically. Myopic springs to mind. Too short sighted to see the bigger picture and move forward. 10 years from now we will still be throttled economically because of this obsession to hold on to power no matter the cost to the country.

  2. Privatisation would certainly help ESKOM to turn the corner. However (that word is always followed by what seems to be a lengthy silence) even if all the obstructive forces, like unions & political ideology were brought to heel who would invest the $$$ billions required??
    Risks would be astronomical. There are better countries in which to invest without political & ideological stumbling blocks & would produce better returns. How is Koeberg going just as an aside??

  3. In consideration to ESKOM, the True culprit of ESKOMS problem is one of finance.

    When the Local Councils, Provinces and Government Departments fail to pay their electricity accounts to ESKOM – or their Local Council, what is then the cause of financial strangulation of a business being unable to perform the business operations.
    Much has been said about the debt owing to Councils but little to nothing seems to change the landscape of the problem.
    As a private business specialist in the field of property, I perform and accept Court appointments for the Administration of Community Schemes in distress.
    Experience in this activity demonstrates that administration implementation under our process of administration brings control and gradual return to function of the scheme while bringing payments and settlements of debt to Councils over a reasonable period of time.
    However the Councils approached with my service offering is ignored and as a result no results of the Councils objective is seen when looking the municipal debt records that are on record.

  4. Eskom as the flagship of our industrialisation and a publicly owned utility was, in 1994, handed over to the control of people rooted in a feudal cultural mindset. Consequently they naturally applied the mechanisms, appropriate to this mindset, to Eskom’s management, and hence the disastrous consequences that confront us.today and the Government’s inability to do anything meaningful in response to them.
    Of course this inability is linked to various ideological frameworks but why has the government adopted these particular ideological frameworks rather than more appropriate ones? The reason is quite simple, I think, they suit a feudal cultural mindset.

  5. Privatisation? At whose cost?
    It is clear that there are industrial players that would love the opportunity to take over the Eskom infrastructure that has been paid for by the tax payer.
    It is exactly what happened to Sasol.

    There is no problem if there are players that want to enter the generation of electricity market, however it not at the expense of the tax payer.
    The political screaming about the IPP’s of the DA is simply obfuscation. It is clear the the RE Wind and Solar want to enter the market piggy banking on Eskom and are simply parasites.
    They rely specifically on political ideology that relies on largesse of the state paid by the tax-payer for their existence.
    Yes let them be REAL generators, providing their own back-up and be able to deliver power on an as and when needed basis like all other private industry players are forced to. The protectionist policies that the RE wind and solar industry demand are simply unfair to other generators.
    The OCGT’s suppliers do not have the same protection and that should be same case for the RE Wind and Solar industries. Provide electricity on an as when and needed demand basis and back-up your own supply to guarantee provision of a commodity.

    • Just how exactly are you imagining privatization to be “at the expense of the taxpayer”?

      Taxpayers are not getting a return on their historical “investment” in Eskom. What is there to “lose”?

      • Quite simple. It is the piggybacking and freeloading that is the issue here.
        Tax payers are funding the RE Wind and Solar scam. The customers are being forced by Government using Eskom to comply with Political UN Demand by the UN-IRENA socialists to enforce a requirement in the IRP of Energy-Mix. It is simply a scam to benefit the investors in the scourge of RE that has no place in a modern power grid. Eskom, is forced to provide a back-up, a spinning reserve for when the wind doesn’t blow or blows to hard and the sun doesn’t shine. Should that not be demanded of this sick industry to provide at their own expense? It is clear if they had to, they could not compete and their already massively expensive useless product would be even more excessively expensive and noncompetitive when compared to Re like OCGT’s. So why are they there? They are leeches simply put.
        This scourge adds to Eskoms woes both in the ability to provide a stable supply while adding to both costs and debts of the utility. Tax payer funding is being used by Government to provide a battery project to attempt to make a commodity out of useless electricity that is unpredictable cannot be dispatched and is intermittent and hugely disruptive to a modern grid. The management of this intermittent supply is also passed on to Eskom to resolve, adding further to its costs as does the cycling of the generators. The additional costs for infrastructure and pylons and wiring in transmission costs also does so. These costs are also conveniently ignored by the RE Wind and Solar industrial complex and are borne by the tax payers in further bail outs by the Tax payers. The battery project proposed by Pravin Gordhan and if foisted on Eskom to to provide for this parasitic industry who should be providing the “proposed battery solution” out their own investments and investor funding and not tax payer funding. Why must Government provide private enterprises with funding? It is as simple as that. This industry is one of the reasons for Eskoms demise just as the poor management, over employment resourcing and political interference are. They all compound and exacerbate the issue. Hope this helps clarify your question.

    • The COSATO thinking and backing is showing clearly. The arguments put forward are hollow and transparently motivated by the old ANC Gordhan thinking that landed us in the present disastrous mess.

  6. The previous public service administration maintained an infrastructure improvement plan that projected what will be developed over the course of the next 5, 10 & 15 years.
    In 1993, they planned to start building an additional 5 power stations starting in 1998, with a projected completion date of 2005. In order to finance these building projects, they worked out a budget and started saving for it.
    As we all know, the dispensation changed in 1994.
    In 1996 the ministry of energy affairs put forward their proposed budget for the 97/98 financial year, including their budget for the building of those planned power stations.
    At the time, the power stations in production were generating slightly more power than was consumed at the time – around 20MW.
    Mandela asked why do they want to waste money on building even more power stations, if they are already producing too much electricity that is just “being wasted”. Explanations that consumers were on the increase and the current supply won’t even be sufficient until 2005, fell on deaf ears. Pointing out that it takes 7 years to build a decent power station, was greeted with incredulity.
    Mandela instructed them to stop the building projects and to transfer the money to the housing department so they can build HOP houses with it. His comment was that people need houses now and since they have the money already, they can spend it there.
    When pointing out to him that the 5 million houses he intended to build (ok, so only about 1 million was ever built) were all going to be using electricity and by 2002 there won’t be enough electricity to service all of SA, his response was that he doesn’t care and it will be the problem of whomever is president of the country in 2002.
    He went further and demanded to know the capacity of every power station on the grid at the time. He then instructed them to switch off 4 power stations whose total capacity equalled the 20MW that was being over produced – to save the taxpayers’ money, according to him.
    When loadshedding started in 2002, every ANC minister was astonished that such a thing was happening, even though most of Mbeki’s cabinet were serving under Mandela and knew exactly why the country had run out of electricity.

  7. This political regime has slowly but surely destroyed this country bit by bit for the last 27 years and there is no going back. Mandela started the mess and it looks like Ramaphosa is finishing it off. The result is catastrophic unless this regime is removed, all its criminals convicted and a whole new political system and leadership put in place.
    Unfortunately, we cannot rely on the masses that believe anything that this regime says and all it takes is a T-shirt and boerewors roll to get them to vote for it. How we should go about a vote with a good result needs ideas from well educated, ethical people.
    Every home in South Africa should have a natural energy device or devices where energy can be sold back to the main grid. No government has the right to tell anyone that he/she may not be self-sustainable.
    This authoritarian dictatorship must be removed immediately.

  8. We all know why Eskom is currentlly in this situation.
    If they received the payments for electricity from the consumers directly, and thereafter make payment to the local municipalities, then they might be able to drag themselves out of this corrupt problem.
    I am working abroad due to not having the opportunity to work on the power stations with the experience I have on power stations from 1985.
    Currently we need to look at another option from the energy users who have installed solar energy systems.
    If they have a 5 kw system in their homes which are the usual installation on a standard house, then they need to be allowed to export some power during the day when their batteries are fully charged.
    I installed a 5kw system, and at around 10:30 in the morning, my batteries are at 100% with the sun still coming up.
    1 hour later my geyser shuts down for the evening wash
    This result in my battery charging device reducing load to my batteries and all the sunlight which can be utilised goes to waste.
    17:30 there is still enough power to make use of an electric stove and other home utilities
    If we were able to export into the grid in order to assist with the country’s energy demand it would be great for the current situation.
    The solar system does have this option available for exporting electricity.
    I am sure that many people in the country will be able to feed into the grid once this possibility arise.

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